Moneybeat – America’s debt spiral


MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to say good morning to financial analyst and adviser David Bahnsen!

DAVID BAHNSEN, GUEST: Hey, good morning, Nick.

EICHER: Glad to hear our economics correspondent out in the field and we can hear the sounds of commerce this morning!

BAHNSEN: Yes. You got the coffee shops and the restaurants and hotels and so forth slowly starting to reopen here. I’m in Midtown Manhattan, one block from Central Park, and it definitely feels like a more energized morning than it had felt a couple months ago.

EICHER: Let me jump in on this story about the closing of the federal government fiscal year ending September 30th with an eye-popping budget deficit of $3.1 trillion. The Wall Street Journal quotes an economist at the Brookings Institution—a former Congressional Budget Office economist—saying there’s zero interest-rate pressure, zero pressure on inflation expectations, basically nothing to see here. Seems nobody’s concerned about this.

BAHNSEN: Well, I think you’re talking about two different things, Nick. I think that nobody is concerned about it and that is because the politicians and to a large degree the people that elect them prefer the spending, including the debt that goes with the spending to the alternative. And yet I think the issue is about interest rates and about inflation expectations as the supposed arbiter of whether or not the debt levels are a good thing is the entire problem. 

The problem with excessive government spending has never been that it’s going to push interest rates higher. The problem with government spending being too high is government spending being too high. It’s that you don’t want a larger government role in the economy because it’s not the most productive use of our resources. It’s a bad allocation if you care about growth and productivity. So I’ve been arguing for several years that the need of the hour is for conservatives to argue for the right reasons for diminished size of the government, because we end up looking at the boy who cried wolf about inflation and interest rates. 

Now, if the fellows at Brookings were being honest, they’d admit one of the reasons interest rates stayed contained is because there is a Fed buying trillions of dollars of bonds to keep interest rates low. So, it’s highly Japanified. It’s highly manipulated. That doesn’t make it a good thing. It just makes it a different kind of bad thing.

EICHER: You said this a few months ago and I’d like for you to repeat what you mean when you say about the debts of the American government, that it makes us less like Venezuela and more like Japan in the sense of overspending. Explain what you mean when you say “Japanified.”

BAHNSEN: Yeah, it means that you get a negative feedback loop, where you’re stuck in a debt spiral and so you solve the debt with additional monetary stimulus, which then leaves interest rates lower, which then disincentivizes growth further and so forth and so on. And that’s where Japan has been for some time. As I am fond of saying, Japan hasn’t fallen into the ocean. It has not been in a depression for 25 years. It just simply hasn’t grown. It’s been a stagnant economy, an aging economy, a reasonably nonproductive one. None of that sounds very good to me, but it hasn’t been catastrophic. It’s just not been what we want out of the American economy. We want vibrancy.

And, unfortunately, when you’re running these types of deficits, you can’t get it.

EICHER: Okay, let’s talk about another of your favorite topics, which is U.S. retail spending. We did get that report for September and it showed that retail spending picked up strongly in September. And that’s supposed to be a sign of good news. But you really see it that way.

BAHNSEN: Well, yeah, but I should be clear. I don’t think that’s bad news either. It’s just not news. That Americans are spenders is not news. It’s baked in, very well known. 

My argument has been for some time that the gauge of a healthy economy is in your production capacity, that you have to be able to produce so that you can then consume. And you have to produce so that others can then consume. OK? That’s the necessary chicken or egg in the economy. And I think that what we have to be able to gauge in a better way is the supply side of the economy, not just merely the fact that Americans are still willing to go buy toys.

EICHER: You mentioned production and I saw the Federal Reserve report that output at factories, fines, and utilities—defined as industrial production —that in September it dropped six tenths of a percent. How do you interpret that news? And I know that’s news.

BAHNSEN: Oh, it is news. There was both some good and some bad, but definitely the overall manufacturing production of the American economy has only recovered about 65% from where we were pre-COVID. I don’t think anyone was expecting it’d be back a hundred percent already, so the jury’s still out, but I remain extremely curious to see what the business investment side, which is where you’ll get a lot of industrial production measurement, will go. The bullish thing that is lingering out there is that there is a lot of cash on the balance sheets of American businesses. The question is, will they invest that into growth and productive activities, or will it sit? Will it only be used to pay back debt or it only be used to kind of cover up cashflow deficits from, you know, declining business. We really don’t know yet. I think it’s going to be a mixed bag, but in a few months, the industrial production number is most certainly going to be far more important than the consumer spending number.

EICHER: David Bahnsen, speaking to us from a bustling coffee shop in midtown Manhattan. David, as always, grateful for your time.

BAHNSEN: Well, thanks very much.


(AP Photo/Frank Franklin II) In this Wednesday, Oct. 14, 2020 file photo, the American Flag hangs outside the New York Stock Exchange in New York. 

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